Sunday, August 18, 2013

Investors are lazy, busy or crazy.

One conclusion that we can draw from our many client meets is that investors are lazy, busy or crazy.

We at AIMS believe that most investors (though not all) don’t have the inclination or knowledge to manage money—their hard earned money—on their own and are victims of procrastination & impulsive decisions. Investors today are too busy with their work, family, personal and family obligations to take out time to manage money on their own and third there is too much information overload nowadays that makes them too hyperactive with managing money on their own while successful investing requires patience and consistency.

A.  Let’s see some of the actions by investors which will emphasize that investors are lazy

1. Investment preference for stocks: - Many investors swear by stocks despite being handicapped by factors like lack of research and proper & genuine information about the company they are investing in. They refuse to sell despite a change in fundamentals of the company. They strongly believe in self-healing properties of the stock and believe that everything’s going to turn out fine in the long run. For example there will still be stocks like IVRCL Infra, Pentamedia Graphics etc. in the portfolio of many investors.

2.   Lack of goal based planning: - Investors fail to map their investments to their life’s goals. As a result they fail to act rationally when markets move down. They ultimately end up buying high & selling low rather than doing the opposite. In the process they destroy wealth rather than creating it.

3.    Goals are either not set or are inadequately set: - Such investors either fail to work towards life’s goals or set unrealistic goals

 B.      Actions which will prove that investors are busy.

1.  I have no time. Such investors are too busy in their jobs to think about their life’s goals and investments. They are always on the move. We have even encountered investors who have not filed their income tax returns for last 4-5 years.

2. Investments are made with the sole objective of saving taxes. Investments are usually made towards the fag end of the financial year with the sole objective of saving taxes. They fail to realize that there’s more to investments than saving taxes.

C.      Investors’ actions which can be categorized as crazy

1.   Buying unsuitable products: - Classic example being insurance bought as investment products. Endowment policies of smaller denominations are readily bought rather than term insurance.

2.  Willingness to take credit risk rather than mark to market risk. A recent example of this is the fiasco at NSEL (National Spot Exchange Ltd). Investors are in the danger of losing approximately Rs. 5600 crores—more damning is the fact that nobody including the regulators, the income tax department, and various other government agencies have a clue as to where has the money gone. Till the scam broke out investors were sold commodities like jeera, castor seed etc. as risk free schemes with unrealistic returns.  No body questioned the proposition or the returns as long as the going was good. The entire investment is presently at risk. However, no one is willing to invest in debt or equity funds believing that the markets may go down even further.

3.  Return is the sole criteria for a good investment. Investors are solely guided by returns (which incidentally is nothing but past performance).They never care to look at the portfolio of the fund which is the talk of the town on return only parameter. Which of the two portfolios (not exhaustive) of short term funds of two fund houses of repute would you consider investing in? Fund House B may be generating a higher YTM on account of high risk investment in realty companies and that too with a low rating.

Fund A
Fund B
%age of AUM
%age of AUM
HPCL Mittal Pipelines(ICRA AA-)
National Housing Bank(AAA)
Mahindra Life Space developers(Crisil A+)
Celica Developers (P) Ltd(BW AA-)
Mahindra World City(A)
Opelina Fin. & Inv (BWR A+)
Edelweiss Housing (AA-)
1 year return
1 year return
*returns as provided by

Hence there is a clear need for a professional advisor who can handhold and help investors with managing money. I think the biggest challenge for investors as on today is to find an advisor whom they can trust completely and give all their money to manage. The 'trust' element which is the biggest gap is what we need to work on as a fraternity.

Your search ends at